Autumn Budget: revision to Entrepreneurs’ Relief

The Autumn Budget has made some significant revisions to the definition of “personal company” which has serious consequences for investors wishing to take advantage of Entrepreneurs’ Relief when making gains from the disposal of shares or securities.

The chancellor’s Autumn Budget contained plenty of good news for businesses, encouraging investment as the country heads towards Brexit; however, the eligibility criteria of Entrepreneurs’ Relief was tightened.

With the revisions, to now qualify for entrepreneurs’ relief for any gains made from the disposal of shares or securities, the issuer of the shares must be the taxpayer’s personal company. However, the criteria as to what constitutes a personal company has changed and will affect any disposals made from 29 October 2018.

To be eligible for Entrepreneurs’ Relief, the taxpayer needs to satisfy the following:

  1. Must be an employee or officer of the company

  2. Hold at least 5 per cent of the “ordinary share capital”

  3. Hold at least 5 per cent of the voting rights associated with the ordinary share capital

  4. Be entitled to at least 5 per cent of the company’s distributable profits

  5. Have a right to at least 5 per cent of the net assets of the company available to equity holders on a winding-up

As to the reason for this change, the response was to ensure that individuals who benefit from Entrepreneurs’ Relief have a true material stake in the company.

The budget briefing said: “Having such an interest is characteristic of true entrepreneurial activity (as distinct from simple investment or employment), so the measure ensures that allowable claims are limited to those which are within the spirit of the relief.”

Who is affected?

If you have your own company and hold ordinary shares with full voting rights and rights to the company’s assets on a winding-up, it is unlikely you will be affected by the change.

However, if you are an employee who has acquired shares through an employee share schemes, particularly EMI shares, you may find that you are not eligible for Entrepreneurs’ Relief, as employee shares tend to be issued with restricted rights.

This is also the case with directors and managers who have taken part in a management buyout. As the shares are acquired through the buyout, the rights on the company’s assets on a winding up will be minimal, as those asset-related rights will likely be held by the financiers of the deal who will have a different class of shares.

Essentially, investors who hold shares with restricted rights will find they have lost access to entrepreneurs’ relief as a result of the revision of the definition of a “personal company”.

Further changes

A further change to Entrepreneurs’ Relief is to take immediate effect for all disposals made from 6 April 2019.

At present, the conditions to be eligible for Entrepreneurs’ Relief must be met for at least one year ending with the date of sale, or if the business has ceased, to the last day of trading.

However, from 6 April 2019, all qualifying conditions, including the new conditions for a personal company described above, will need to be met for at least two years ending with the date of disposal, or the cessation of trading.

If you’re an investor and are uncertain about your qualifications, you may want to hold off on any business sales until you can get your timing right. The changes announced in the Budget may also impact the Enterprise Management Incentive (EMI) scheme and businesses may need to look at bringing forward the date at which share options are issued to employees prior to any sale.

Although Entrepreneurs’ Relief may be curtailed in some circumstances, the relief is still in place for most plus the Autumn Budget is overall set to benefit businesses, especially in the short-term.

See also Entrepreneurs' Relief to double.

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